Topic: Sinking in sunk costs
PM Clinic: Week 18 discussion summary
Compiled: 3/7/2005
The Situation:
My team was faced with the choice of buying expensive off-the-shelf software or writing
it in-house - we decided on the latter course since it was an important tool (a software
performance analyzer), was within the range of our expertise, and is something we expect
to customize in the future. After five months of development (a month beyond the initial
schedule), the product is still not working properly, and is significantly far away
from completion (another 8 weeks by current estimates). The in-house development costs
have already exceeded the costs of the off-the-shelf product. When should the PM face
reality and persuade management to buy the product? Or should we throw good money after
bad and wrestle the in-house product to completion?
- Sinking in sunk costs, Vancouver BC
Advice:
- See the situation fixing a train wreck in progress.
- You still need to flesh out the plan for doing the work yourself. Only then can
you evaluate this approach vs. purchasing the off the shelf product.
- Kremer strongly recommended spending lots of time with the off the shelf program.
Once you've committed to it, it will be expensive to undo your choice. If you can,
beta test using the software in the real work environment and seriously evaluate it
before you commit to it.
- Berkun pointed out that all the MBA advice says to ignore sunk cost. You never throw
good money after bad. Make each decision on its own merits, not on what it will possibly
recover from past mistakes (or put another way, trying to undo mistakes is not the
same thing as progress).
- Make vs. Buy decisions should hinge on how central the software is to your organization.
If it's a core part of the business, you want to make and own. If it's a small part
of the business, you want to rent, borrow or outsource. (E.g. A good italian restaurant
should not buy pre-made tomato sauce, but might buy prepackaged silverware).
Contributors
J Kremer, Scott Berkun (editor) |